McNealy Ends 22-Year Run as Sun CEO

Wall Street's tepid reaction to Scott McNealy's exit as CEO of Sun Microsystems Inc. underscored a question on many investors' minds: Can Jonathan Schwartz, the ex-chief's ponytailed protege and hand-picked successor, reverse the company's long slide?

The server and software maker's stock closed just a penny higher, to $4.99 per share, on the Nasdaq Stock Market on Tuesday, a day after McNealy stepped down and Schwartz said he had no immediate plans to make drastic changes in Sun's operations.

With shares stuck in the range of $3.42 to $5.40 over the past year -- as much as 95 percent off its high of about $64 in September 2000 -- investors said they won't buy again until Sun's leadership articulates a clear turnaround strategy.

"We're disappointed that they didn't announce concrete plans to get their costs realigned," said Sunil Reddy, a portfolio manager at Fifth Third Asset Management, which sold Sun shares after the Internet bubble burst and hasn't touched them since.

McNealy, the 51-year-old maverick who has run Sun for 22 years, has frequently been at odds with financial analysts for his reluctance to reduce its engineer ranks, trim spending on research and development, and even lop off whole sections of the company, such as the group that designs microprocessors that compete with those made by Intel Corp.

The hope among Reddy and others on Wall Street was that Schwartz, 40, might prompt Sun to finally make the painful cuts that have helped other companies, including Hewlett-Packard Co. and IBM Corp., return to profitability.

But Schwartz, during a conference call Monday, gave no indication that such changes are in store.

"We're looking after how do we grow for the next 10 years," said Schwartz, who added that the biggest difference between him and McNealy is their preferences for beer and sports. "This is not about trying to figure out how to go take a whack out of head count."

A.G. Edwards analyst David Wong agreed that Schwartz "does not plan to implement any major change in strategic direction." He maintained a hold on the stock, saying he didn't believe Sun's four-year streak of losses would end until the company undertakes a "new major strategic initiative."

Schwartz joined Sun in 1996 with its acquisition of Lighthouse Design Ltd., a 35-employee company he founded to make software for Apple Computer Inc. co-founder Steve Jobs' NeXT computer.

McNealy almost immediately took a liking to Schwartz. Over the last decade, Schwartz has held at least seven positions within Sun, including its software chief and head of strategic planning. In 2004, he was named president and chief operating officer.

Working within many of the constraints set by McNealy, Schwartz has been an agent of change, said Forrester Research analyst John R. Rymer.

In 2004, Schwartz decided to bundle many of Sun's business software titles into a single package and price it based on the number of employees a company had. Schwartz also initiated what amounts to time-sharing rentals for large computer servers and data storage boxes. Customers pay by the number of computer cycles and megabytes they use rather than buying gear outright.

And after the freely available Linux operating system became a staple in large corporate networks, it was under Schwartz that Sun Solaris, considered by some to be the gold standard of operating systems, became a free download.

Rymer applauded the moves because he said they put competitors such as IBM and HP on the defensive. But he agreed with Schwartz's critics who say there's no proof the initiatives have translated into higher revenue.

Schwartz held out the possibility of change, saying he and Michael Lehman -- the Sun chief financial officer who retired in 2002 and recently returned to the position -- would undertake a comprehensive review of the company.

Both he and Lehman, whose return sparked speculation he was on a mission to control spending, declined to forecast where Sun's head count, which stands at about 38,000 was headed.

"Mike and I are going to be tightly linked, which of course we'll ensure by sharing an office and going through lockstep examining every resource for the company," Schwartz said in an interview on Monday.


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